Repurposing fiscal policy for Bangladesh to achieve an economy for all

Highlight: Bangladesh's fiscal crisis is not rooted in excessive spending, but in a chronic failure to tax fairly and spend credibly—eroding state capacity, public trust and the foundations of long-term development

Bangladesh today stands at a fiscal and developmental cliff. The deposed regime left behind not merely a weakened macroeconomic balance sheet but a fractured social compact: depleted public trust, eroded institutions, rising poverty and joblessness, stalled industrial dynamism, and a fiscal state increasingly unable to finance its own development ambitions. 

Repurposing fiscal policy is, therefore, not a technocratic exercise of budget reallocation. It is a political–economic project of restoring state capacity, rebuilding social solidarity and reconstructing a development pathway capable of delivering both growth and justice for the quality of life of its citizens.

Drawing on political economy, fiscal sociology, development traps, and state capacity in Bangladesh, and informed by global reflections, Bangladesh must move beyond crisis management towards a threefold agenda: restoration, recovery, and reconstruction. This also requires harmonisation of fiscal and monetary policies. 

Only such a reorientation can credibly anchor the ambition of becoming a trillion-dollar economy by 2034 and creating 10 million decent jobs by June 2027.

The fiscal inheritance: An economy left on the brink

The deposed regime presided over a striking paradox. For much of the past decade, Bangladesh's headline GDP growth rate averaging above 6% was showcased as evidence of macroeconomic success and policy competence. Yet, beneath this surface, the structural foundations of growth steadily eroded. By FY2024–25, the economy revealed a constellation of deeply interlinked stresses—macroeconomic, fiscal, industrial, and social—that together exposed the fragility of the growth model and the exhaustion of the prevailing fiscal–political settlement.

Investment, long recognised as the engine of structural transformation, stagnated despite repeated proclamations of investor confidence. Gross investment remained trapped in a narrow band of roughly 30% to 31% of GDP for nearly a decade. However, this aggregate masked a more troubling reality. Private investment stagnated at around 23% to 23.5% of GDP, according to the Bangladesh Bureau of Statistics (BBS), evincing little responsiveness to growth rhetoric, tax incentives or large-scale infrastructure expansion. This stagnation reflected not merely cyclical caution but deeper pathologies embedded in the political economy. 

This was mired by policy unpredictability, financial repression and rising non-performing loans in the banking system, weak contract enforcement due to an entrenched regime of elite capture that privileged connected clientele over productive and innovative entrepreneurship in order to cling to power. This is a classic case of primitive accumulation through patronage distribution networks. 

Compounding these weaknesses was a sharp deterioration in domestic savings. Gross domestic savings fell precipitously from around 32% of GDP in 2016 to 28% by 2024, signalling a profound erosion of household and corporate resilience. Growth increasingly became consumption-driven and import-dependent, sustained by remittance inflows and public borrowing rather than by productive reinvestment of domestic surplus. This collapse of savings not only constrained future investment but also rendered the economy more vulnerable to external shocks, exchange rate pressures and sudden stops in capital flows. This was harboured by large-scale looting, resulting in the drainage of illicit outflows of capital.
 
Public investment, meanwhile, failed to compensate for private sector inertia. Instead of crowding in private capital or raising economy-wide productivity, public investment increasingly flowed into large, capital-intensive megaprojects characterised by cost overruns, delayed completion, and weak employment multipliers. The efficiency of investment declined, as evidenced by rising incremental capital–output ratios, indicating that ever-larger volumes of capital were required to generate each unit of additional growth. The growth that was achieved thus rested on an increasingly fragile and inefficient accumulation process.

Alongside investment inertia, Bangladesh began to experience early but unmistakable signs of deindustrialisation. Manufacturing's share of GDP remained effectively frozen between 22% and 24% for more than a decade, an alarming outcome for a lower-middle-income country that had yet to complete its structural transformation. Within manufacturing, the real growth of small and medium manufacturing enterprises consistently lagged behind aggregate industrial growth, pointing to a hollowing out of the productive base. Industrial dynamism narrowed rather than diversified.

Export concentration intensified to a degree that heightened systemic vulnerability. Ready-made garments (RMG) continued to account for over 84% of total export earnings, exposing the economy to global demand shocks, price competition and tightening labour and environmental standards. Backward and forward linkages remained weak, domestic value addition stagnated, and technological upgrading proceeded slowly. Furthermore, the scheduled graduation from least developed country (LDC) status on 24 November 2026 in an era of geopolitical fragmentation and reconfiguration of global value chains, exposes risks emanating from the erosion of trade preferences. For decades, the country's growth was anchored in preferential market access, low-cost labour, and export concentration, particularly in RMG. 

These structural weaknesses translated directly into worsening social outcomes, revealing the social limits of headline growth. Official poverty statistics understated the depth and breadth of distress. More robust multidimensional frameworks indicate that poverty and vulnerability together likely encompassed over 40% of the population by the mid-2020s. Conservative independent estimates suggest that income poverty alone rebounded to between 22% and 24% following the pandemic, while an additional 20% of the population hovered just above the poverty line, highly exposed to inflation, illness, job loss, or climate shocks. 

Working poverty expanded rapidly, informal employment deepened and housing precarity intensified as real wages failed to keep pace with rising living costs. Adjustment occurred less through open unemployment than through declining job quality, shorter hours, and falling real earnings, especially among informal and casual workers.

The labour market became the clearest indictment of the inherited growth model. Bangladesh's labour force expanded by approximately 2.2 million new entrants each year, yet the economy generated only a fraction of the formal jobs required to absorb them. Youth unemployment stood at around 12.5% by official estimates, while broader measures of youth underemployment and discouraged work pushed the figure well beyond 15%. For millions of youths, the promised demographic dividend began to morph into demographic anxiety, frustration and outward migration.

Underlying these outcomes lay a chronically weak and regressive fiscal state. Bangladesh's tax-to-GDP ratio stagnated at around 8.1%, among the world's lowest and virtually unchanged for over a decade. More than 65% of tax revenue derived from indirect taxes such as VAT and customs duties, disproportionately burdening lower- and middle-income households while wealth, property, and high incomes remained lightly taxed. 

The tax expenditure regime further undermined fiscal capacity and legitimacy. Exemptions, preferential rates and incentives—often opaque and poorly evaluated—resulted in forgone revenue equivalent to at least 3% of GDP annually by conservative estimates, disproportionately benefiting politically connected conglomerates. This entrenched fiscal privilege weakened compliance and public trust. 

Fiscal stress intensified through rising debt servicing obligations. Public debt, at around 40% of GDP, appeared moderate by international benchmarks, creating an illusion of sustainability. Yet this ratio obscured a far more binding constraint of revenue weakness. Interest expenditure absorbed over 28% of total government revenue by FY2024–25 and was projected to rise further, steadily crowding out expenditures on education, health, maintenance, and development priorities. Fiscal space narrowed not because of excessive social spending, but because of inefficient borrowing combined with chronic under-taxation. 

The erosion of public goods constituted perhaps the most damaging legacy of this fiscal trajectory. Public expenditure on education stagnated at around 1.8% to 2% of GDP, less than half the global average, undermining human capital formation at every stage. Health spending remained below 1% of GDP, forcing households to finance more than 70% of healthcare costs out of pocket and pushing millions into poverty through illness each year. 

Social protection allocations rose modestly in nominal terms, reaching around 2.5% to 3% of GDP, yet remained fragmented across more than one hundred schemes with low benefit adequacy, weak coordination, and limited coverage of urban and informal workers.

This configuration was not accidental. It reflected a political settlement in which fiscal policy functioned less as an instrument of development transformation and more as a mechanism for rent distribution and regime maintenance. The outcome was a state that taxed little, borrowed increasingly, and spent inefficiently—an unsustainable equilibrium that left the economy exposed, society fragmented, and future development mortgaged.

Restoration: Rebuilding fiscal credibility and state capacity

The first and most immediate task is restoration through stabilising the fiscal system while re-establishing the credibility of the state as both a fair collector of revenue and an effective, accountable spender. Without this dual legitimacy, neither recovery nor reconstruction can succeed. 

Fiscal policy in Bangladesh has long suffered from a crisis of trust. Citizens perceive taxation as arbitrary, expenditure as captured, and incentives as skewed towards the politically connected, undermining compliance and the social contract that underpin modern statehood.

Enforcing the revenue base

The country cannot finance development nor sustain macroeconomic stability with a tax system that mobilises less than one-tenth of national income. Deep structural revenue reform is, therefore, essential. The core challenge is not technical incapacity but a political economy that has historically shielded the oligarchic clienteles. 

At the heart of this problem lies the extraordinarily narrow direct tax base. Fewer than 4.1 million individuals actively filed income tax returns in a country with over 70 million adults. Large segments of high-income professionals, traders, contractors, and property owners remain outside the tax net through informality, exemptions and administrative tolerance. Expanding direct taxation is, therefore, primarily a political decision, confronting entrenched privilege and redefining fiscal citizenship.

Equally corrosive to revenue mobilisation has been the proliferation of subsidies, tax exemptions, preferential rates and incentives. The interim government has allocated Tk620 billion for subsidies in the power sector. The deposed regime had allocated Tk400 billion for the 2024–25 fiscal year. Rationalising the tax system, with ex post performance-based incentives, is both a revenue imperative and a governance reform, instilling the perception that the fiscal system serves society at large.

Illustration: TBS

Value-added tax, in principle the backbone of modern tax systems, has underperformed. Despite statutory rates comparable to regional peers, VAT yields remain low due to exemptions, under-invoicing, and weak enforcement. A simplified VAT regime, anchored in fewer rates, limited exemptions and technology-driven compliance, is critical not only for revenue mobilisation but also for reducing distortions that penalise compliant firms while rewarding evasion.

Besides feasible reforms in the income tax system for enhancing the tax net, introducing effective property valuation, transparent registries, and progressive property taxation would mobilise significant resources while curbing speculative accumulation that inflates housing costs and deepens inequality.

Revenue reform must be framed as a fairness compact rather than coercion. Citizens must see that everyone contributes according to capacity and that proceeds finance tangible public goods—schools, hospitals, transport, and protection against insecurity. Without this legitimacy, fiscal consolidation will provoke resistance, evasion and political backlash, rendering reform unsustainable. Raising tax mobilisation requires not just commitment from political parties but society at large, and for such changes in social values, multiple avenues have to be explored including social awareness campaigns, citizens' tax summits etc.

Expenditure discipline without austerity
Restoration does not mean austerity. It entails enforcing discipline by ending waste, leakage, and prestige spending that yields low social and economic returns. Over the past decade, cost overruns, politically motivated mega-projects and opaque public–private arrangements absorbed vast fiscal resources while delivering little in terms of employment or productivity. Such practices weakened both fiscal outcomes and public confidence. There is a need for the overhauling of cash and treasury management and budget oversight to reduce waste. 

A restored fiscal state can only be anchored through expenditure decisions rooted in rigorous appraisal, transparency and parliamentary scrutiny. Maintenance of existing assets, often neglected in favour of new projects, must regain priority to prevent the silent erosion of public capital. A reform agenda on practical ways forward regarding state-owned enterprises (SOEs), following forensic audit, is a call of the day. 

Public investment choices should be evaluated not only in terms of engineering completion but also in terms of opportunity cost, employment impact and long-term fiscal implications.

Debt management is an integral component of expenditure discipline. Refinancing and interest rate risks can only be mitigated through longer-maturity, lower-cost domestic borrowing while contracting external debt on non-concessional terms should be approached with extreme caution. 

Restoration is, thus, about reclaiming fiscal sovereignty—not through contraction but through credibility, setting the foundation for recovery and reconstruction.

Recovery: Fiscal policy as an engine of jobs and security

The second objective is recovery, deploying fiscal policy to revive growth, restore employment and rebuild social confidence. Recovery cannot just wait for macroeconomic indicators to improve. 

It must itself serve as the mechanism through which stability and legitimacy are regained. At the centre of this lie employment, social protection and the rebuilding of household and community resilience.

Jobs first: Fiscal policy for employment

The country cannot recover without work. Growth without employment has already exhausted its social and political credibility. Meeting the target of creating 10 million jobs by June 2027 requires a mission-oriented, employment-centred fiscal strategy rather than a passive assumption that jobs will materialise as a by-product of growth. 

Fiscal policy must be assessed not only by deficit targets or debt ratios but by the quantity, quality, and inclusiveness of employment it generates.

Public investment is crucial. There is a requirement of moving toward a principle that public goods such as education, health and defence as well as intergenerational commons such as air, water, soil, forest, climate are to be financed through the public exchequer.  While infrastructure projects can organise capital through bonds and other products that also ensure ownership by people, boosting the savings behaviour of the citizens, transforming the capital market from the current frontier status to that of an emerging market.

Evidence from Bangladesh and comparable economies indicates that labour-intensive investments in cottage, small and medium enterprises (CSMEs) yield far higher employment per taka than capital-intensive projects. Reviving small and medium enterprises, alongside the vast informal sector, is another cornerstone of employment-led recovery. CSMEs account for the majority of non-farm employment but have been systematically constrained by financial repression, complex taxation and uneven regulatory enforcement. 

Credit guarantee schemes, simplified tax regimes, and preferential access to public procurement can rapidly relieve these constraints, sustain existing jobs, and encourage formalisation, productivity growth and innovation. 

One village, one product could be a starter. The scheduled banks could gradually move toward limiting their financing only to CSMEs to address the structural weaknesses of the banking system.

Rural infrastructure, including water management and climate-resilient agriculture, can absorb large numbers of workers while raising productivity. In urban areas, investments in housing, sanitation, public transport, waste management and community services address acute deficits while generating jobs for semi-skilled and unskilled workers. 

Climate adaptation and biological diversity —canal digging, drainage, afforestation, and coastal protection—offer significant employment opportunities if labour intensity is prioritised. Care services, including childcare, elder care and community health work remain underdeveloped yet have high employment potential, especially for women.

Emerging sectors also provide opportunities for job-rich recovery aligned with long-term development needs. The green economy—including renewable energy, energy efficiency, waste recycling, and environmental services—generates employment while reducing vulnerability to climate shocks. 

Expanding health and education services, particularly through need-based reorganisation of technical and vocational training (TVT) and scaling up of skills, simultaneously addresses critical human development gaps and creates stable, socially valuable employment at home and abroad. 

Fiscal multipliers are highest when spending reaches households with high marginal propensities to consume, namely the working poor and lower middle classes who bear the brunt of adjustment and shocks.

Social protection as risk-sharing, not charity, rather as rights
Employment alone is insufficient if households remain exposed to pervasive insecurity. A transition toward universal risk-pooling mechanisms is critical, inspired by social insurance logic as well as experience in Bangladesh that targeting has not worked . Workers and peasants, particularly those in informal employment, require support against unemployment and underemployment. Health risk protection is urgent.
 
Social protection must also adopt a lifecycle approach, integrating old-age allowances with contributory elements for those able to pay, while ensuring redistribution for the most vulnerable. 

The gradual introduction of mechanisms such as Family Cards for women, Farmers Cards and Health Cards for all has potential to stabilise demand, reduce insecurity, and facilitate labour mobility, directly contributing to economic recovery.

As longevity is increasing, it is time to initiate a sovereign wealth fund to pay for social security, including a universal pension.

Reconstruction: Financing a Trillion-Dollar, High-Capability Economy
The third objective could be reshaping fiscal policy to support deep structural transformation to anchor the aspiration of a trillion-dollar economy by 2034. Such a reconstruction goes beyond restoring stability or reviving short-term growth. 

It is about building an economy with high productive capacity, diversified industrial foundations and resilient institutions capable of sustaining prosperity over the long run. Fiscal policy in this phase must operate as a strategic instrument of nation-building rather than as a residual accounting exercise.

Investing in public goods to raise productivity

No country achieves upper-middle or high-income status without deliberate, sustained investment in public goods. Bangladesh's current expenditure falls far short of historical and global benchmarks. Public investment must therefore be reoriented decisively toward goods that expand capabilities across generations and raise economy-wide productivity.

Education is central to this transformation. Bangladesh spends less than half the global average. The consequences are overcrowded classrooms, underpaid and undertrained teachers, poor learning outcomes, and limited pathways into skilled employment. Reconstruction demands universal access to quality early childhood education, systematic teacher improvement, expansion of technical and vocational education aligned with labour market needs, and the development of research universities to generate innovation and retain talent domestically. 

Healthcare remains another foundational public good. The high out-of-pocket expenditure exposes households to financial catastrophe. Universal health coverage, funded through pooled financing and targeted subsidies, is both progressive and fiscally prudent. By maintaining a healthier workforce and preventing medical impoverishment, such investment yields returns extending far beyond the health sector itself.

Urban systems, including transport, housing, water, and sanitation, will increasingly determine national productivity. Strategic public investment in integrated urban transport, affordable housing, and basic services is critical to sustaining growth in a densely populated, rapidly urbanising economy. The creative economy and sports deserve special attention for national reconstruction as well as formalisation for enhanced employment generation. 

Public R&D spending is negligible, with weak academia–industry linkages. This is limiting technological upgrading, export diversification and global competitiveness. There is a need for increasing efficiency driven absorptive capacity. For example, unused IT parks and underutilised BSCIC plots could be reinvigorated through start-ups, workspace allocation while allowing international financial gateways to function for inward remittances for the freelancers. 

These expenditures are productive investments rather than consumption. By raising human capital, reducing transaction costs, and fostering innovation, they expand the economy's future tax base and strengthen fiscal sustainability.

Industrialisation, investment and structural change
Reconstruction also requires reducing dependence on a single export sector through attracting domestic and foreign investment, including for a green transition. Industrialisation is a national necessity central to export resilience, technological progress and the social promise of reconstruction for a good living.

This requires a complete overhaul of the investment regime, releasing it from the clutches of bureaucratic red-tapism. An over-regulated state breeds corruption. Allowing markets to function and stopping concentration require institutions of self-governing market mechanisms such as a strengthened valuation system, audit and credit rating agencies, legal enforcement and whistle-blowing policies. These require the professional regulatory bodies to assert teeth as and when required.

An economy for all entails an enlarged shareholding economy, with emphasis on diversified investment products so that an ordinary citizen can transform savings into investment in the capital market. This could address the structural constraints of financing, including for the state in energy and infrastructure, as well as the reduction in bank defaults since the banks lend on a long-term basis, borrowing on a short-term basis. A complete overhaul of equity markets, besides a long-drawn behavioural change campaign for transforming into a society of savers, is a call of the hour.

A reform in the incentive system is overdue to make instruments time-bound, performance-linked to reward productivity, export diversification, and technological learning rather than mere capacity expansion.

Strategic public investment in reliable energy, skills development and logistics is required to overcome supply chain disruptions.

A coordinated industrial policy embedded within fiscal discipline and institutional accountability ensures public finance supports learning, competition and upgrading. 

Towards a new fiscal compact for inter-generational quality of life 
Repurposing fiscal policy in Bangladesh ultimately requires the construction of a new fiscal compact between the state and its citizens to achieve an economy for all through the democratisation of the economy. This compact must rest on three pillars: (a) fair contribution, ending the culture of fiscal privilege, (b) visible returns in education, health, jobs, and protection that citizens can feel and (c) sustainability that builds the foundation for generations to withstand climate shocks, demographic change and global volatility.

For this compact to be credible, it must rest on three mutually reinforcing principles, as outlined above. First, it must ensure the democratisation of fair contribution by ending the long-standing culture of fiscal privilege, in which oligarchic clientele have historically escaped meaningful taxation while the burden has fallen disproportionately on consumption. By compelling all segments of society to contribute according to capacity, the state can restore legitimacy and reinforce the social contract. 

Second, the compact must deliver visible returns, translating public resources into education, health, employment, and social protection that citizens can experience and evaluate. The quality of these services must be tangible, encompassing better schools, accessible healthcare, secure livelihoods and protection against shocks so that taxation is perceived not as a coercive extraction but as an investment in collective well-being. 

Third, it must adopt a future-oriented inter-generational perspective, building fiscal, social, and institutional buffers to mitigate the impact of climate shocks, demographic transitions, technological disruptions and global volatility. Such foresight ensures that public finance can absorb crises without fracturing the social and economic fabric in this heightened age of geo-economics.

The crisis inherited from the deposed regime is undeniably severe, but the July Uprising of 2024 and the spirit of the 1971 War of Liberation ask for a society rooted in equity, human dignity and social justice.

Fiscal policy, if repurposed with ambition, integrity and credibility, can restore trust in the state, recover livelihoods eroded by exclusion and insecurity, and reconstruct the development trajectory on more durable foundations. 

Achieving a trillion-dollar economy is not merely a slogan or a statistical target. It has to be a deliberate fiscal, social and political choice. Realising this vision begins with the democratisation of the economy through placing the public at the centre of public finance and reasserting fiscal policy as an instrument of collective progress rather than narrow privilege. By embedding fairness, visibility and future resilience into fiscal practice, the country can transform the inherited fragility of its state into the foundation for a stable, secure, just and prosperous society.